Cash versus Stock Payment Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after tax annual cash flows by $2.7 million indefinitely. The current market value of Teller is $64 million, and that of Penn is $128 million. The appropriate discount rate for the incremental cash flows is 12 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $87 million in cash to Teller's shareholders.
a. What is the cost of each alternative?
b. What is the NPV of each alternative?
c. Which alternative should Penn choose?